Privatization of the Utilities in Abu Dhabi, UAE
- Independent Water and Power Producers
Private companies that enter into a joint venture with the government
- Single Buyer Model
The designation by the government of a single entity as the buyer of water and energy produced
- Utilities Sector
Government sector responsible for providing basic utilities such as water and energy
- Water-Energy Nexus
The simultaneous generation of water and energy in a single proximal space
Privatization as an instrument of economic policy was one of the economic reforms adopted by many countries in the past decades and is considered today as a significant economic and political strategy shaping the global economic landscape (Guriev and Megginson 2005). With the increasing momentum of privatization worldwide, countries in the Arab world are no longer faced with the choice of whether to privatize or not. The more important challenge is how these countries privatize their state-owned enterprises while taking cognizance of the lessons from the privatization practices and experiences of countries in the global context (Megginson and Netter 2001).
State-owned enterprises are an important feature of the economic landscape in many Arab countries and are looked up to as anchors of national development and competitiveness (OECD 2005, 2010). What makes privatization different in these countries is that their circumstances vary from those of developed and developing countries primarily when it comes to the drivers of privatization when seen in the context of their culture, history, and economic development (Afridi et al. 2015). The Gulf countries, for instance, are not cash-strapped, and privatization is seen as a means of getting access to many forms of private know-how which is scarce in the regional context; hence they do not see the need to make trade-offs between internal fund-raising and long-term structural reforms (Al Hashemi 2016). This is reflected in the situation of Abu Dhabi which makes it a good case for understanding how specific political, social, financial, legal, and other factors inform the policy choices on privatization.
The double-digit increase in the demand for electricity and water in Abu Dhabi in the past few years is expected to escalate, and this prompted the government to strategically address the challenge by entering into contracts with private power companies to participate in its utilities sector. This led to the establishment of the Abu Dhabi Water and Electricity Authority pursuant to the Abu Dhabi Electricity Law, which is now responsible for all matters relating to formulation, development, and implementation of government policy relative to the electricity sector, including its privatization. Currently, its larger production capacity and extensive distribution network had allowed the Abu Dhabi Water and Electricity Authority to assist the other Emirates in meeting their power demand.
Privatization of Utilities
The privatization of utilities in Abu Dhabi was largely an internally motivated initiative that was driven by the vision of His Highness Sheikh Zayed Al Nahyan, founder of the UAE and herein referred to as the leader. He had the vision to look beyond its budget surplus and understood well that the benefits from the private sector went way beyond delivery of finance (Parmigiani 2015). Hence from the start, privatization in Abu Dhabi was backstopped by strong leadership. Weak leadership can be a hindrance to privatization as shown in the privatization experiences of neighboring countries’ case of Algeria, Tunisia, and Morocco (Biygautane and Lahouel 2011).
The conditions in Abu Dhabi such as its vast capital resources, business-friendly environment, transparent and accountable government, and the inspiration provided by the leader’s vision to build a sustainable, open, and globally competitive economy paved the way for implementing privatization in the Emirate. In the context of the utilities sector, the government adopted the single buyer model to resolve the twin issues of providing adequate water and energy to communities in the Emirate (Alsulaiman et al. 2015).
In the conceptual template of the single buyer model, the electric power industry is no longer vertically integrated because of the entrance of new players: the Independent Power Producers. The role of the Independent Power Producers was to generate electricity and sell this to the national power company of the country. Based on the model, there is only a single entity that acts as the buyer, and competition only occurs at the generation level.
The model was set in motion starting with the unbundling of the utilities sector in 1999 that led to the creation of the Abu Dhabi Water and Electricity Authority, Abu Dhabi Water and Electricity Company, Transmission Company, and the Abu Dhabi and Al Ain Distribution Companies, all of which are 100% government-owned. After its inception, the Abu Dhabi Water and Electricity Authority entered into joint ventures with foreign investors who were allowed a 40% ownership of the partnership. Independent Water and Power Producers operate under the signed power and water purchase agreement of 20 years with Abu Dhabi Water and Electricity Company as the sole buyer of their products. The Regulation and Supervision Bureau issues the operating licenses to the Independent Water and Power Producers and monitors the maintenance of these licenses. In contrast, the traditional model used in Abu Dhabi was the vertically integrated cogeneration of water and power where only one entity owned and took responsibility for the whole supply chain (Abu Dhabi Water and Electricity Authority 2008).
The Abu Dhabi single buyer model is a unique model in which the energy market is extensively powered by Independent Power Producers and functions under an independent regulator. There are considerable government control and oversight. Having a majority stake in the generation and a single buyer model, competition is limited except in the tendering of new generation plant. The single buyer model implemented in Abu Dhabi sector eliminates competitive pool arrangement because all production output is purchased by the single buyer. The majority of large-scale production companies are privately operated and partly owned (40%) by foreign investors. All electricity and water output is sold to the Abu Dhabi Water and Electricity Company which acts as the single buyer. This model creates a high level of certainty between producers and the Abu Dhabi Water and Electricity Company through long-term (typically 20 years) power and water purchase agreements, more commonly referred to as “offtake agreements.” The bureau regulates only the Abu Dhabi Water and Electricity Company and each project company.
On the whole, the utilities sector in Abu Dhabi had demonstrated dramatic changes in the past 15 years with improved provision of services to the populace. Partial privatization has also reduced disruptions, and inefficiencies in both networks have also been greatly reduced under the new model. It is quite unique as noted by USAID (2012) as it hosts 50% of the national demand and 35% of the national demand with 96% of power generation coming from the Independent Power Producers.
A significant aspect of the implementation of privatization is the legal framework. Law 2 of 1998 concerning the reorganization of the electricity sector has been effectively crafted based on related legislations. One such legislation was the Crown Prince Decision which echoed the leader’s vision on the economic development of the Emirate and also legally institutionalized these as guiding principles in crafting the law on the privatization of the utilities sector. Through the law, the leader’s vision was not a matter of rhetoric but a reflection of political will. At best, privatization in Abu Dhabi is vision-driven which makes it uniquely endemic to the Emirate.
One feature of privatization in Abu Dhabi which makes it different from other privatization drives is being able to reduce rules and regulation to let the market decide what is best. An added attraction in the model is that the 11% return on investment guaranteed in the contract is generating strong competition for the Independent Water and Power Producer bids. All these features have made the Independent Power Producers and the financial sectors readily embrace the single buyer model in Abu Dhabi.
Measures for ensuring the alignment of the activities and processes of the Independent Water and Power Producers with the economic goals of the Emirate were built into the preoperational phase and operational phases of the process. In the preoperational phase, templates for competitive bidding, models of various project agreements, and project documents have been created to enable alignment of processes and activities. These are reflected in the power purchase agreements, the award of contracts, ownership structure, financing, and contractual arrangements already in place.
In terms of power and water purchase agreement, there are two main components of payments to the Independent Water and Power Producers. The capacity (or availability) payments covered the fixed cost of the plant which included return on capital, depreciation, and fixed operating and maintenance cost. This was paid after the plant was made available for production regardless of the bulk of the output to be produced. The output (or energy or water) payments was (paid only for the output) actually produced by the plant. The payment rates are annually indexed against the US and UAE inflation rate or the USD-AED exchange rate. Fuel suppliers are paid directly by the single buyer for the fuel consumed by each Independent Water and Power Producer. The Independent Water and Power Producers are incentivized for fuel efficiency consumption by a bonus-penalty mechanism based on the benchmarks set or by reference heat rates.
Capacity payments and fuel costs account for about 90% of the production cost shouldered by the single buyer. In addition, the single buyer also pays shared facility cost whenever applicable.
In terms of the award of the contract, the Independent Water and Power Producers developed generation and desalination projects on a build, own, and operate (BOO) basis, where projects were awarded through a competitive bidding process. The primary bidding criterion for greenfield projects is the lowest level of tariff for the sale of water and electricity to the single buyer. For brownfield projects, the criterion is the highest asset value of given tariffs. The water and electricity authority managed the bidding process through prequalification of bidders, issues the request for proposals, and selection of the successful bidder for the projects. The successful bidder can be a single company or a consortium of companies.
In terms of ownership structure, a successful bidder and a local holding company establish an Independent Water and Power Producer as a joint stock company. The successful bidder owns 40% of the share capital of the Independent Water and Power Producer, and 60% is owned by the local holding company. The local holding company is established by the electricity and water authority that is entitled to 10% ownership, while 90% is owned by Abu Dhabi National Energy Company (Taqa).
Taqa, on the other hand, is owned by the electricity and water authority (51%) and the government-affiliated Farmers’ Fund (24.1%). The remaining share of 24.9% is owned by private stakeholders who are exclusively UAE nationals. Taqa is one of the largest companies listed on the Abu Dhabi stock exchange.
The source of funding for the project comes from a combination of debt, equity, or internally generated net cash flows of the Independent Water and Power Producer. The arrangement for debt is on a nonrecourse project financing basis. In this arrangement, the successful bidder is responsible for taking care of the required financing and negotiating financing arrangement with the lenders. The debt to equity ratio is 80:20 which may be raised depending on the capital market.
A simplified contractual arrangement for an Independent Water and Power Producer is adopted where the risk is allocated to the best party, thereby making the Independent Water and Power Producer a low-risk transaction. In terms of the land lease agreement, the water and electricity authority acquires the land intended for the project. In which case, the Independent Water and Power Producer is granted an exclusive long-term leasehold on the land including easement rights for access to the land during the project duration. The land lease agreement stipulates the mutual responsibilities in relation to the use of the land and environmental impacts. Furthermore, it stipulates the conditions for the surrender of the land after the project is terminated.
Benefits of the Privatization of the Utilities Sector
Efficiency gains. For more than 15 years and nine Independent Water and Power Producer companies, the single buyer model accounted for more than 95% of generation and has provided substantial benefits for both the government and the public sector. The regulatory mandate resulted in a robust network at the transmission and generation levels at a competitive cost. This is supported by an extensive capital investment program which makes the network secure and reliable.
Gains from strategic investors. Privatization enables the host country to gain from the global expertise and experience of strategic investors. The provisions set by the Abu Dhabi Water and Electricity Authority for the bidding process stipulated requirements that result in the inflow of the best expertise and technology in the privatization of the utilities sector. This means that the successful bidders bring in not only new human resources and modern technology but also operational management techniques, structures, and processes. Existing employees can learn from the foreign company and improve their skills through training. This leads to further reform in the sector.
Impact on the financial health of the sector. Overall, privatization has impacted the returns to governments implementing privatization as well as their private partners. The good fiscal policy that streamlined financial procedures added to the financial performance of the industry.
The impact on the financial health of the sector can be seen in terms of measures such as liquidity, solvency, profitability, and financial effectiveness. By all indications, putting the sole buyer in the hands of the Abu Dhabi Water and Electricity Company guarantees that financial obligations on the sales of power and water are met on time.
Escalating the performance benchmark. It was evident that the unbundling of the utilities sector created regulatory authorities, managing bodies, and operational entities that rationalized the structure for privatization. The embodiment of the vision of HH Sheikh Zayed Al Nahyan in the development roadmap of the Emirate and its diligent implementation is a concrete manifestation of political will and good governance. Privatization has led to transparency and accountability not only in the practice of governance but also in reporting to the public. The institutionalized preoperational and operational arrangements between the Abu Dhabi Water and Electricity Authority and Independent Water and Power Producers ensure that both operational and financial performances are aligned to the strategic goals for privatization. Commercial management includes billing processes, customer service, and communication. The evidence for this indicator in terms of the Emirate comes in the form of the prompt and uninterrupted services provided to the customers and the outreach program of providing utilities to the farthest localities of the Emirate.
Strong political will. The most significant driver of privatization in the Emirate of Abu Dhabi is the vision of the leader which is enshrined in Abu Dhabi Vision 2030. As demonstrated, the leader’s vision is not a matter of rhetoric but a reflection of strong political will and commitment to developing the Emirate.
Government support. Privatization of the utilities sector in Abu Dhabi was able to attain its goals because of the convergence of support from different government institutions. The transition from one stage to the other was smooth because of massive support provided by the government.
Planning is the key. Upon its announcement, the Crown Prince mobilized the proper authorities to come up with a long-term economic road for the Emirate that delivers upon the vision of the leader. Thereupon, Abu Dhabi Vision 2030 was formulated based on Policy Agenda 2007–2008 which among others provided for developing a partnership with the private sector.
Setting appropriate privatization objectives. The goals of privatization were dovetailed with the overall development goals to attain the vision of the Emirate. On the basis of the sector’s goals, the appropriate objectives were set that considered the intent of the vision but defined in the context of the utilities sector. In this manner, the attainment of the objectives in the micro level will contribute to goal attainment at the macro level.
Alignment. One of the most significant factors in the privatization efforts of the utilities sector in Abu Dhabi is the alignment of policies and strategies, structures and functions, and processes and activities with the overall goals of privatization. This is the result of diligent planning and the creation of the proper authorities that oversee, regulate, and monitor both the preoperational and operational stages of privatization to ensure optimum alignment.
Stable and transparent legal and regulatory framework. For one, the success of privatization in Abu Dhabi is one account of a strong legal and regulatory framework. The laws enacted are strong and binding and are subject to constant review to keep it updated with global standards as evinced in the amendments introduced to the electricity and water laws. The mandates of the regulatory bodies likewise keep the balance of interest of the government and its private partners.
Willingness to learn. The road toward privatization in Abu Dhabi would not have been that smooth if not for the favorable attitude of the government to learn from the experts. Without a doubt, private consultants and foreign experts played a tremendous role in helping the government set the stage for privatization in the onset. This willingness to learn has paved the way for knowledge transfer which has significantly benefitted the sector.
Favorable incentives. Attracting international strategic investors is critical to achieving privatization objectives. As shown in the case of Abu Dhabi, the enthusiasm of private companies to invest in Abu Dhabi’s utilities sector was not dampened by the economic downturn of 2008 and 2009. This is because of the stability of the Emirate and its capacity to provide favorable incentives to private investors.
Risk management. One contributory factor attracting private investment is the low-risk environment. As shown, the sound policies crafted by the sector, openness, transparency, accountability, and the regulation of private assets all contribute to attaining the privatization goals in the Emirate.
Human capital development. The benefit of privatization to the community through the nationalization program or Emiratization is a productive way of developing the nation’s human capital. Emiratization is a part of the performance indicators of the Independent Water and Electricity Producers, and this has created the opportunity for high-value employment for UAE nationals. Part of the success of privatization in the Emirate is that it balances interests between private investors and the government without losing sight of the social agenda of providing the best employment opportunities to its citizens.
The privatization of utilities in Abu Dhabi is one that is driven by political will. It all started with the vision of the leader, and everything else such as laws, regulatory frameworks, structural support, and financial mechanisms followed. This concept of a vision-driven privatization in rentier states under favorable conditions makes a worthwhile contribution to existing theoretical perspectives.
On the whole, the partial privatization of the utilities sector is robustly contributing to the realization of the leader’s vision for the economic development of the Emirate. The series of legislation that culminated in the creation of Abu Dhabi Water and Electricity Authority and beyond institutionalized a framework for enhancing the business environment through legislative reforms. Privatization also opened the opportunity for Abu Dhabi Water and Electricity Authority to enter into joint ventures with world leading companies, thereby enhancing the business climate to integrate Abu Dhabi in the global economy by attracting foreign investment and international partners. All these are concrete indicators that privatization is contributing to economic diversification. Overall these reforms in the utilities sectors have not only shifted the government’s function from “rowing” to “steering” but are edified milestones that see the leader’s vision come to life.
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